wallach lance He is an expert in abusive tax transactions, in a good way. He warns people about them and then helps those who didn’t listen to his warnings or take them seriously enough. A couple of weeks ago he called me to encourage me to write about the Employment Retention Credit (ERC). He told me that his phone wouldn’t stop ringing about it, I thought ERC and the abuse that was going on with him was old news. That’s mostly because the only # I pay much attention to is the #TaxTwitter. You may not follow #TaxTwitter, but the IRS clearly does


even the new york times
it’s becoming fashionable

New York Times story

Alan Rappeport has a story on ERC in the New York Times. It’s pretty good, even excellent by New York Times tax coverage standards. I love the New York Times. Brian Moroney, an English teacher at Xavier High School, asked us to get him on Sundays and read the literary section. And then there are the obituaries. Tax coverage not so much. Appears in the headline This little-known pandemic-era tax credit has become a magnet for fraud. Tax professionals have been dealing with the problem of ERC fraud for a while. This is from almost a year ago.


Rappeport’s story closes with the most recent warning from the IRS: IRS Alerts Businesses, Tax-Exempt Groups Of Warning Signs Of Deceptive Employee Retention Scams; simple steps can prevent incorrect claim filing.

How did we get here?

The current batch of scammers is just another example of the seemingly irresistible impulse to use the Tax Code as the Swiss army knife of social policy while refusing to take IRS application funding seriously. Throw in a plague, which is how I refer to COVID-19, and we had the worst tax seasons (2020, 2021, and 2022) in at least a generation. I am 71 years old and started working in public accounting at a large local firm in 1979. I was on the sidelines when all this happened. My partner and I had retired from the boutique practice we had ended our careers with at the end of 2018.

We were touring the country in our RV. I was consulting for some CPAs and of course writing so I was in touch with how difficult this was for tax professionals. , tax accounting is a pretty smooth life. Most of the stress in it is created by greed and ego, not necessarily the greed and ego of those experiencing the stress. Those seasons were different. Tax professionals were supported as a kind of emergency financial body to direct funds to keep businesses going. There was even money in the legislation to pay them, but the banks stuck with it.


in a May 2021 article in Think Outside The Tax Box, I referred to the Employee Retention Credit as the ugly stepchild of the CARES Act of 2020. The reason was that the Paycheck Protection Program was much easier to access, once it was properly executed and applied much more widely. . And initially I couldn’t get a PPP loan and qualify for ERC. Then, on December 27, 2020, came the Taxpayer Security and Disaster Tax Relief Act. In addition to boosting the ERC for 2021, it retroactively allowed PPP participants to take credit.

PPP was an SBA loan that he obtained from a bank. If you spent the income correctly, you didn’t have to pay it back and, as the Law of Certainty makes clear, you could still deduct the expenses. ERC is a credit claimed on quarterly payroll tax returns. That meant that at least for 2020, you had to modify your payroll to obtain the credit. The other thing about the ERC is that you didn’t get an income tax deduction for the wages that the ERC claimed. And you couldn’t use the wages ERC took for to claim PPP loan forgiveness.

For my article, I interviewed Jeff Kristoff, tax director at Rosen Associates in Westborough Mass. They put together all the pieces for their clients to do the ERC refund work, making sure it was reflected correctly on tax returns and coordinated with PPP forgiveness applications. They also made sure that customers actually qualified for the ERC in the quarters in which it is claimed.


And now

I checked back with Jeff Kristoff to see how he is doing with ERC now. No longer a live show, so all of the ERC action now involves modifying the quarterly returns filed for 2020 and 2021. Quarter-over-quarter there will be fewer eligible returns within the statute, creating a sense of urgency particularly among teams. of night flights that are exploiting this situation.

At Jeff’s firm, they regularly receive emails from clients who have been asked to say “Do I qualify for this?”. As he says:

“The story is always the same. They get an official-sounding letter saying they’re eligible for credit or they talked to someone who got an ERC and in both situations they’re told it’s ‘no risk, only pay if we find a refund.’ ” That’s the problem: There were so many programs during COVID that business owners rely on experts to know what they’re eligible for. When a consultant offers them a free analysis, they assume there’s no harm. But there’s no analysis, the ERC mill almost It is always promoted by a seller who before 2021 was selling some other product and has no tax experience.”

The big complexity in the ERC is not the calculations that can be automated, but whether there was a truly qualifying shutdown order or a sufficient decline in revenue. And this is what happens


“Typically, after a customer talks to a vendor, they get an engagement letter. Remember, the vendor says ‘of course you qualify, and we’ll do an analysis.’ Each engagement letter included language that the business owner determined that I qualified and was hiring the consultant to do a calculation.”

If the customer bites then

“Then the consultant takes the payroll, sometimes ignoring PPP/ERC optimization, caps the employee wages and throws them at a 941. When a business owner receives the funds, they simply assume the IRS has approved the payroll.” refund claim, which of course is not the case, the IRS just processed a 941-X and the consultant wants a big % of the refund.”

Modifying the income statement to eliminate deductions is not something the consultant does. That’s left up to the heavy-handed tax preparer who didn’t tell them they qualified, which they probably didn’t. And when the IRS comes knocking, the consultants will already be gone.


Lance Wallach tells me these scams are unlike any he’s seen before. They are more widely applicable and do not require the same level of sophistication to run.

Like conservation easements and microcaptives, the IRS, given its recent warning, will be tougher on taxpayers who make egregious ERC claims.

“Unlike previous scams like the 419 welfare benefit or 412i plans, which required a large outlay of money, the market for ERC plans is much larger. Like syndicated conservation easements, captive insurance , the 412i or 419 plans, the marketing is the same If your accountant was educated and not an IRS tax collector you would already be on the plan Unlike the other schemes I have received a high volume of phone calls from homeowners of businesses that, unfortunately, will be audited”.


The Employee Retention Credit was a program in place for less than two years that was subject to multiple rule changes. It was a serious fight for tax professionals who wanted to get it right.


I once did a back-of-the-envelope estimate of how many people make at least a portion of their living working in income tax, what I call the tax industry. I came up with a million, I’m not sure how good the estimate was, but it’s within reason. One thing about the group, whatever its true size, is that no one knows everything.

The other thing about the tax industry is that it tries to deliver to its clients two things that are in tension with each other. It helps you pay reasonably and helps you not pay more than you owe. What adds to the tension between those two is that the IRS is badly damaged. There are a lot of issues like basis, at risk, and passive activity loss rules where if you have someone who knows what they’re doing prepare your return, you’ll probably pay more than if you have a preparer who doesn’t pay much. attention to those issues.

If your return is audited and the agent discovers the problem, you will be charged for the deficiency and interest and probably a 20% penalty, although you will have a better argument to get out of the latter. What are the chances of it happening? Probably less than 1%, so does it make sense to pay more for someone who knows the rules better? Sure you do, if you want more peace of mind and want to be a good citizen.


Of course, the more knowledgeable adviser may know the benefits to which you are entitled or better ways to structure transactions. And he may have a high audit profile, so it’s prudent to be meticulous about compliance. So he’ll get more for his money’s worth by working with more knowledgeable advisors. They won’t know everything yet. And maybe you’ll learn something they didn’t think to mention to you.

That’s where consultants come in. It never occurred to him that much of what he does qualifies for the research and development credit. His adviser did not suggest that an engineer could discover all the various components that are part of your building that can be written off much faster. Those are among the most respectable, although sometimes they go further.

Other things like monetized installment sales and syndicated conservation easements are, in my opinion, off limits. The Employee Retention Credit is something that regular tax preparers might have overlooked, so it makes sense to alert people to the credit. However, you should only make claims for people who actually qualify, which probably means there wouldn’t be as much business.


The case for simplifying the income tax by using it solely as a way to raise the necessary revenue seems hopeless. Many things are uncertain, but we can almost guarantee this. The people now promoting bogus ERC refund claims will have something else to promote before the latest ERC refund claim is submitted.

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